NetDragon Websoft Holdings Limited 網龍網絡控股有限公司file.download.99.com/down/ir_e_20190326.pdf · • Non-GAAP2 operating profit was RMB402.5 million, representing an

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NetDragon Websoft Holdings Limited網龍網絡控股有限公司

(incorporated in the Cayman Islands with limited liability)(Stock Code: 777)

ANNOUNCEMENT OF FINAL RESULTSFOR THE YEAR ENDED 31 DECEMBER 2018

BUSINESS REVIEW AND OUTLOOK

2018 was a record year for NetDragon Websoft Holdings Limited (the “Company”)and its subsidiaries (collectively referred to as the “Group”), as both revenue andoperating profit reached record-highs. The Group recorded revenue of RMB5,037.5million in 2018, up 30.2% year-over-year, and operating profit of RMB526.4 millionin 2018, versus operating loss of RMB30.0 million in 2017. In addition, the Groupgenerated cash inflows from operations of RMB694.1 million, up 105.9%year-over-year. These remarkable numbers were underpinned by the strong executionin both gaming and education segments.

The gaming business revenue grew by 41.5% year-over-year to a record-highRMB2,367.4 million in 2018. Mobile games remained a major growth driver, with49.3% year-over-year growth in revenue. In terms of new games development,several new games in the pipeline have recently obtained license approvals. It isoptimistic that the industry’s licensing will continue. On the other hand, the Groupwill continue to execute the strategy to maximize IP values and accelerate the growthfurther by expanding the IP portfolio, both organically and by working with differentpartners.

The Group is also excited by the exceptional growth of the education business. Inoverseas, adoption of the interactive learning technologies continued to expandrapidly in both developed and emerging countries. As a result, the subsidiaries,Promethean Group (“Promethean”) strengthened its global market leadership in K-12interactive learning technologies during the year with number-one market share inmajor markets including the U.S. and vast majority of the EU countries. It is also

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pleased to complete the acquisition of Edmodo, Inc. (“Edmodo”) in May 2018. WithEdmodo joining the Group, it is in a unique position to offer a complete productportfolio that covers pre-class, in-class and after-class learning environments,anywhere and at any time. More importantly, the online community has accumulatedmore than 100 million of registered users to date, which will enable the Group toaccelerate user monetization.

In China, the Group remained focused to drive adoption of the software platforms. Asat the end of 2018, the installed base of the flagship platform 101 Education PPT inChina was 5.0 million, as compared to 1.2 million as at the end of 2017, covering all34 provinces and cities across China.

Gaming Business

The gaming business revenue grew by 41.5% year-over-year to a record-highRMB2,367.4 million in 2018. As a result of strong top line growth combined withoperating leverage, gaming’s core segmental profit jumped by 92.5% year-over-year.

PC games recorded 39.8% year-over-year revenue growth to RMB1,915.0 million in2018. The number set a new historical-high over the 20 years of operating history. Onthe other hand, mobile games registered strong revenue growth of 49.3%year-over-year to RMB452.4 million in 2018. In particular, the combined monthlygross billings of the pocket version of Eudemons Online (魔域) and Eudemons OnlineMobile averaged RMB100 million during the second half of 2018. During the year,the Group also focused on enhancing user experience by introducing new expansionpacks, content updates and game features. As such, the ARPU surged by 64.8%year-over-year to RMB665 in 2018.

Looking forward, the Group will continue to drive growth by maximizing the IPvalues with new games and game-play features, as well as expanding the IP portfoliovia self-development and partnerships. Finally, the Group is in a good position tolaunch a number of new games in 2019 as several new games in the pipeline haverecently obtained license approvals, while some others are awaiting approvalsfollowing the applications. Currently, the pipeline is solid and diversified, as theGroup plans to introduce multiple games under new IPs and genres in 2019. Theseinclude a series of SLG and MOBA games which are expected to have tremendousupside in terms of monetization.

Education Business

The education business revenue increased by 21.9% year-over-year to RMB2,565.6million on the back of strong execution and solid progress being made on all fronts.

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In overseas, it is pleased to see Promethean recorded revenue of RMB2,200.3 millionin 2018, up 25.9% year-over-year. During the year, the Group sustained the growthmomentum in the major markets across developed countries, particularly in the USand Europe. It is also excelled on the back of the Belt and Road Initiatives as theGroup continued to expand into new markets across emerging countries, includingEgypt, Nigeria, Kenya and Malaysia. In addition, the shipment of the sizable secondphase tender of Moscow’s multi-year Online School project as a part of its “SmartCity” initiative was completed. As a result, not only did Promethean strengthen itsmarket leadership in K-12 interactive displays, but it also reported a net profit ofRMB151.5 million in 2018, as compared to RMB5.0 million in 2017.

The Group also made progress in building the learning community with theacquisition of Edmodo during the year of 2018. To date, the total users of Edmodohave exceeded 100 million in over 400,000 schools across more than 190 countries.Combining Edmodo with Promethean’s interactive learning technologies, thecomprehensive product portfolio will support the entire learning process, in and outof the classroom, including lesson preparation, lesson delivery, student collaboration,homework features, teacher-student-parent communications, education contentmarketplace and resources sharing. By capturing all the major use cases in K-12learning, the complete product offerings will put the Group in a unique position toconvert significant user traffic into massive monetization opportunities.

In China, the strategy focus remained expanding user coverage and its traction wasremarkable. As at the end of 2018, the flagship software platform 101 Education PPTin China reached 5.0 million installations, as compared to 1.2 million as at the endof 2017. Furthermore, the VR business scaled quickly on the back of rising demandof VR-related projects across China, driven by the country’s objective to promotecreativity. The Ministry of Education has also recently made VR a professionalmajor, which has in turn laid the foundation for the future growth in this space. Asa result of the growth in the VR business which entails higher gross margins, theChina education business recorded a 13.6% increase in gross profit year-over-year.

Looking forward, the Group expects to start the online service monetization in thesecond half of 2019 as it plans to launch the new online tutoring service on Edmodo.It is also excited that the new Promethean ActivPanel Element Series will acceleratecloud-based connectivity amongst students and teachers, which together withEdmodo, will drive user engagement both in classrooms and at home. In China, theGroup is also devising a strategy to start large-scale penetration of Prometheanofferings during the year of 2018.

The vision to revolutionize education with advanced technologies remains firm andclear. The Group is on a mission to create “the classrooms of the future” and it isbelieved that the Group is best positioned with the best-in-class learning products andtechnologies.

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FINANCIAL HIGHLIGHTS

2018 Second Half Financial Highlights

• Revenue was RMB2,567.6 million, representing a 22.7% increase

year-over-year.

• Revenue from the games business was RMB1,328.1 million, representing 51.7%

of the Group’s total revenue, registered a 52.6% increase year-over-year.

• Revenue from the education business was RMB1,181.5 million, representing

46.0% of the Group’s total revenue, registered a 0.9% increase year-over-year.

• Gross profit was RMB1,645.1 million, representing a 43.5% increaseyear-over-year.

• Core segmental profit1 from the games business was RMB775.5 million,representing an 127.4% increase year-over-year.

• Core segmental loss1 from the education business was RMB262.1 million,representing an 11.9% increase year-over-year.

• Non-GAAP2 operating profit was RMB402.5 million, representing an 1,848.3%increase year-over-year.

• Profit attributable to owners of the Company was RMB344.8 million, comparedto loss attributable to owners of the Company RMB46.6 million for the sameperiod last year.

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Fiscal Year 2018 Financial Highlights

• Revenue was RMB5,037.5 million, representing a 30.2% increaseyear-over-year.

• Revenue from the games business was RMB2,367.4 million, representing 47.0%of the Group’s total revenue, registered a 41.5% increase year-over-year.

• Revenue from the education business was RMB2,565.6 million, representing50.9% of the Group’s total revenue, registered a 21.9% increase year-over-year.

• Gross profit was RMB3,047.2 million, representing a 39.8% increaseyear-over-year.

• Core segmental profit1 from the games business was RMB1,299.9 million,representing a 92.5% increase year-over-year.

• Core segmental loss1 from the education business was RMB420.7 million,representing a 0.6% decrease year-over-year.

• Non-GAAP2 operating profit was RMB651.8 million, representing an 853.8%increase year-over-year.

• Profit attributable to owners of the Company was RMB545.6 million, comparedto loss attributable to owners of the Company of RMB20.8 million last year.

• The Board of Directors proposed a final dividend of HKD0.15 per share (2017:HKD0.10 per share), subject to approval by shareholders in the coming AnnualGerenal Meeing.

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Segmental Financial Highlights

2018 Second HalfFY2018 2H FY2018 1H FY2017 2H

(RMB’000) Gaming Education Gaming Education Gaming Education

Revenue 1,328,059 1,181,482 1,039,346 1,384,074 870,453 1,171,213Gross profit 1,283,856 344,558 978,499 421,499 810,186 316,503Gross margin 96.7% 29.2% 94.1% 30.5% 93.1% 27.0%Core segmental profit (loss)1 775,547 (262,056) 524,376 (158,650) 341,007 (234,116)Segmental operating

expenses3

- Research and development (236,489) (234,807) (222,443) (214,525) (236,651) (203,125)- Selling and marketing (136,703) (216,543) (102,609) (224,161) (102,853) (223,341)- Administrative (152,237) (126,497) (143,806) (113,000) (143,786) (90,354)

Fiscal Year 2018FY2018 FY2017 Variance

(RMB’000) Gaming Education Gaming Education Gaming Education

Revenue 2,367,405 2,565,556 1,672,858 2,105,290 41.5% 21.9%Gross profit 2,262,355 766,057 1,565,359 589,675 44.5% 29.9%Gross margin 95.6% 29.9% 93.6% 28.0% 2.0% 1.9%Core segmental profit (loss)1 1,299,923 (420,706) 675,117 (423,340) 92.5% (0.6)%Segmental operating

expenses3

- Research and development (458,932) (449,332) (439,811) (386,916) 4.3% 16.1%- Selling and marketing (239,312) (440,704) (199,971) (415,392) 19.7% 6.1%- Administrative (296,043) (239,497) (277,695) (159,156) 6.6% 50.5%

Note 1: Core segmental profit (loss) figures are derived from the Company’s reported segmental profit (loss)figures (presented in accordance with Hong Kong Financial Reporting Standard 8 (“HKFRS 8”)) butexclude non-core/operating, non-recurring or unallocated items including government grants, fair valuechange and finance cost of financial instruments and fair value change of convertible preferred shares.

Note 2: To supplement the consolidated results of the Group prepared in accordance with Hong Kong FinancialReporting Standards (“HKFRSs”), the use of non-GAAP operating profit measure is provided solely toenhance the overall understanding of the Group’s current financial performance. The non-GAAPoperating profit measure is not expressly permitted measure under HKFRSs and may not be comparableto similarly titled measure for other companies. The non-GAAP operating profit of the Group excludesshare-based payments expense, amortisation of intangible assets arising on acquisition of subsidiariesand impairment of goodwill.

Note 3: Segmental operating expenses exclude unallocated expenses such as depreciation and amortisation thathave been grouped into SG&A categories on the Company’s reported consolidated financial statementsbut cannot be allocated to specific business segments for purpose of calculating the segmental profit(loss) figures in accordance with HKFRS 8.

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RESULTS

The board (the “Board”) of directors (the “Directors”) of the Company announced the

audited consolidated financial results of the Group for the year ended 31 December

2018 together with the comparative figures in 2017 as follows:

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHERCOMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 DECEMBER 2018

2018 2017NOTES RMB’000 RMB’000

Revenue 4 5,037,539 3,867,623Cost of revenue (1,990,298) (1,687,860)

Gross profit 3,047,241 2,179,763Other income and gains 4 118,189 95,393Impairment loss, net of reversal (11,717) (275)Selling and marketing expenses (697,871) (624,716)Administrative expenses (853,180) (734,560)Development costs (922,867) (844,076)Other expenses and losses (150,308) (100,134)Share of losses of associates (1,370) (822)Share of loss of a joint venture (1,717) (567)

Operating profit (loss) 526,400 (29,994)Interest income on pledged bank deposits 3,607 2,558Exchange (loss) gain on secured bank borrowings

and convertible preferred shares (10,030) 3,250Net gain on convertible preferred shares 60,659 2,809Net loss on disposal of property held for sale (68) —Net fair value gain on held-for-trading investment — 58Finance costs 5 (12,415) (10,409)

Profit (loss) before taxation 568,153 (31,728)Taxation 7 (91,349) (57,209)

Profit (loss) for the year 476,804 (88,937)

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2018 2017NOTE RMB’000 RMB’000

Other comprehensive income (expense) for theyear, net of income tax:

Items that may be reclassified subsequently toprofit or loss:

Exchange differences arising on translation offoreign operations 4,332 9,174

Fair value loss on available-for-sale investment — (17,385)Release of reserve upon impairment of

available-for-sale investment — 28,6874,332 20,476

Items that will not be reclassified to profit orloss:

Fair value loss on equity instruments at fair valuethrough other comprehensive income (8,366) —

Write off of equity instrument at fair valuethrough other comprehensive income (1,000) —

(9,366) —

Other comprehensive (expense) income forthe year (5,034) 20,476

Total comprehensive income (expense) forthe year 471,770 (68,461)

Profit (loss) for the year attributable to:- Owners of the Company 545,573 (20,843)- Non-controlling interests (68,769) (68,094)

476,804 (88,937)

Total comprehensive income (expense) for theyear attributable to:- Owners of the Company 541,430 (3,168)- Non-controlling interests (69,660) (65,293)

471,770 (68,461)

RMB cents RMB cents

Earnings (loss) per share 9- Basic 102.42 (4.12)- Diluted 102.27 (4.12)

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CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAT 31 DECEMBER 2018

2018 2017NOTES RMB’000 RMB’000

Non-current assetsProperty, plant and equipment 1,657,417 1,373,026Prepaid lease payments 293,228 515,299Investment properties 77,281 64,532Intangible assets 824,991 715,578Interests in associates 23,591 15,961Interest in a joint venture 15,716 17,433Available-for-sale investments — 10,859Equity instruments at fair value through other

comprehensive income 1,493 —Loan receivables 12,850 18,410Trade receivables 10 — 3,912Prepayments and deposits 45,564 —Contract assets 2,389 —Restricted bank deposit — 5,000Deposits made for acquisition of property, plant

and equipment 7,698 7,441Goodwill 390,640 388,675Deferred tax assets 38,169 4,160

3,391,027 3,140,286

Current assetsProperties under development 536,848 160,141Property held for sale — 9,213Inventories 267,420 106,430Prepaid lease payments 6,636 9,866Loan receivables 16,078 4,662Trade receivables 10 450,435 380,072Amounts due from customers for contract work — 16,522Other receivables, prepayments and deposits 320,360 255,948Contract assets 29,775 —Amount due from a related company 140 1,704Amounts due from associates 2,105 5,264Amount due from a joint venture 751 159Tax recoverable 1,126 1,497Restricted bank balances 15,089 20,332Pledged bank deposits 156,168 145,084Bank deposit over three months 68,632 —Bank balances and cash 1,483,352 1,578,477

3,354,915 2,695,371

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2018 2017NOTES RMB’000 RMB’000

Current liabilitiesTrade and other payables 11 783,040 680,736Contract liabilities 412,462 —Amounts due to customers for contract work — 1,691Provisions 59,936 41,246Deferred income — 95,531Amount due to a related company 982 1,400Amounts due to associates 720 305Secured bank borrowings 12 155,157 146,132Promissory note — 46,226Tax payable 70,095 23,339

1,482,392 1,036,606

Net current assets 1,872,523 1,658,765

Total assets less current liabilities 5,263,550 4,799,051

Non-current liabilitiesOther payables 22,219 2,693Convertible preferred shares 108,904 95,249Secured bank borrowings 12 169,604 86,582Deferred tax liabilities 163,843 130,466

464,570 314,990

Net assets 4,798,980 4,484,061

Capital and reservesShare capital 38,863 39,094Share premium and reserves 4,893,941 4,510,073

Equity attributable to owners of the Company 4,932,804 4,549,167Non-controlling interests (133,824) (65,106)

4,798,980 4,484,061

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 DECEMBER 2018

Attributable to owners of the Company

Sharecapital

Sharepremium

Capitalredemption

reserveOther

reserveCapitalreserve

Statutoryreserves

Dividendreserve

Revaluationreserve

Treasuryshare

reserve

Employeeshare-based

compensationreserve

Translationreserve

Available-for-sale

investment/equity

instruments atfair value

through othercomprehensiveincome reserve

Retainedprofits Sub-total

Non-controlling

interestsTotal

equityRMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

At 1 January 2017 36,571 830,126 6,155 28,170 10,035 292,864 44,374 22,449 (2,120) 20,357 (118,365) (11,302) 2,694,515 3,853,829 (25,552) 3,828,277

Loss for the year — — — — — — — — — — — — (20,843) (20,843) (68,094) (88,937)Other comprehensive income

for the year — — — — — — — — — — 6,373 11,302 — 17,675 2,801 20,476

Total comprehensive income(expense) for the year — — — — — — — — — — 6,373 11,302 (20,843) (3,168) (65,293) (68,461)

Repurchase and cancellation ofshares (201) (48,946) 201 — — — — — — — — — (201) (49,147) — (49,147)

Shares issued upon exercise ofshare options 169 15,906 — — — — — — — (4,983) — — — 11,092 — 11,092

Issue of new shares 2,555 818,366 — — — — — — — — — — — 820,921 — 820,921Contributions from

non-controlling interests ofsubsidiaries — — — — — — — — — — — — — — 26,382 26,382

Recognition of equity-settledshare-based payments — — — — — — — — — 5,014 — — — 5,014 — 5,014

Awarded shares vested toemployees — — — — — — — — 1,168 (3,754) — — 2,586 — — —

Deemed disposal ofsubsidiaries tonon-controlling shareholders — — — 1,975 — — — — — — — — — 1,975 (1,975) —

Acquisition of additionalequity interests fromnon-controlling interests — — — (3,754) — — — — — — — — — (3,754) 1,332 (2,422)

Final dividend for 2016 paid — — — — — — (44,374) — — — — — (84) (44,458) — (44,458)Interim dividend for 2017

declared and paid — — — — — — — — — — — — (43,137) (43,137) — (43,137)Final dividend for 2017

proposed — — — — — — 44,661 — — — — — (44,661) — — —Transfers — — — — — 43,542 — — — — — — (43,542) — — —

At 31 December 2017 39,094 1,615,452 6,356 26,391 10,035 336,406 44,661 22,449 (952) 16,634 (111,992) — 2,544,633 4,549,167 (65,106) 4,484,061

Profit (loss) for the year — — — — — — — — — — — — 545,573 545,573 (68,769) 476,804Other comprehensive income

(expense) for the year — — — — — — — — — — 5,191 (8,340) (994) (4,143) (891) (5,034)

Total comprehensive income(expense) for the year — — — — — — — — — — 5,191 (8,340) 544,579 541,430 (69,660) 471,770

Repurchase and cancellation ofshares (239) (49,435) 239 — — — — — — — — — (239) (49,674) — (49,674)

Shares issued upon exercise ofshare options 8 2,615 — — — — — — — (862) — — — 1,761 — 1,761

Purchase of treasury shares — — — — — — — — (39,324) — — — — (39,324) — (39,324)Contributions from

non-controlling interests ofsubsidiaries — — — — — — — — — — — — — — 127 127

Recognition of equity-settledshare-based payments — — — — — — — — — 21,531 — — — 21,531 — 21,531

Awarded shares vested toemployees — — — — — — — — 7,094 (9,012) — — 1,918 — — —

Deemed disposal ofsubsidiaries tonon-controlling shareholders — — — 149 — — — — — — — — — 149 (149) —

Acquisition of additionalequity interests fromnon-controlling interests — — — (2,867) — — — — — — — — — (2,867) 852 (2,015)

Final dividend for 2017 paid — — — — — — (44,661) — — — — — 72 (44,589) — (44,589)Interim dividend for 2018

declared and paid — — — — — — — — — — — — (44,780) (44,780) — (44,780)Final dividend for 2018

proposed — — — — — — 69,809 — — — — — (69,809) — — —Deregistration of a subsidiary — — — — — (354) — — — — — — 354 — 112 112Transfers — — — — — 69,735 — — — — — — (69,735) — — —

At 31 December 2018 38,863 1,568,632 6,595 23,673 10,035 405,787 69,809 22,449 (33,182) 28,291 (106,801) (8,340) 2,906,993 4,932,804 (133,824) 4,798,980

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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE YEAR ENDED 31 DECEMBER 2018

2018 2017RMB’000 RMB’000

NET CASH FROM OPERATINGACTIVITIES 694,131 337,072

INVESTING ACTIVITIESPurchase of property, plant and equipment (431,434) (342,596)Placement of bank deposits over three

months (266,960) —Acquisition of subsidiaries (92,425) (2,365)Purchase of intangible assets (71,518) (37,552)Advance of loan receivables (12,015) (6,817)Deposits paid for acquisition of property,

plant and equipment (10,128) (10,583)Investment in an associate (9,000) —Purchase of prepaid lease payments (1,901) (23,355)Increase in amount due from a joint

venture (592) (159)Placement of pledged bank deposits (160) (145,089)Withdrawal of bank deposits over three

months 206,053 54,858Interest received 15,690 8,360Proceeds from disposal of property held

for sale 8,857 —Repayment of loan receivables 6,719 17,315Withdrawal of restricted bank balances 5,243 —Withdrawal of restricted bank deposit 5,000 —Decrease in amount due from a related

company 1,564 —Proceeds from disposal of property, plant

and equipment 1,252 1,751Withdrawal of pledged bank deposits 105 393Placement of restricted bank balances — (20,332)Investment in a joint venture — (18,000)Purchase of property held for sale — (11,238)Purchase of available-for-sale investments — (10,361)Placement of restricted bank deposit — (5,000)Refund of deposit paid for acquisition of

property, plant and equipment — 5,000NET CASH USED IN INVESTING

ACTIVITIES (645,650) (545,770)

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2018 2017RMB’000 RMB’000

FINANCING ACTIVITIESNew bank borrowings raised 250,788 1,679,758Proceeds from shares issued upon exercise

of share options 1,761 11,092Repayment of secured bank borrowings (169,704) (1,472,732)Dividends paid (89,369) (87,595)Payment for repurchase and cancellation of

shares (49,674) (49,147)Repayment of promissory note (45,311) —Payment for purchase of treasury shares (39,324) —Acquisitions of additional equity interests

from non-controlling interests (2,015) (2,422)Proceeds from issue of new shares — 820,921Contribution from non-controlling interests

of subsidiaries — 22,285

NET CASH (USED IN) FROMFINANCING ACTIVITIES (142,848) 922,160

NET (DECREASE) INCREASE INCASH AND CASH EQUIVALENTS (94,367) 713,462

CASH AND CASH EQUIVALENTS ATBEGINNING OF THE YEAR 1,578,477 876,532

EFFECT OF EXCHANGE RATECHANGES ON THE BALANCE OFCASH HELD IN FOREIGNCURRENCIES (758) (11,517)

CASH AND CASH EQUIVALENTS ATEND OF THE YEAR, REPRESENTEDBY BANK BALANCES AND CASH 1,483,352 1,578,477

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2018

1. GENERAL

The Company was incorporated in the Cayman Islands on 29 July 2004 as an exempted company

with limited liability and its shares are listed on the Main Board of the Stock Exchange of Hong

Kong Limited (the “Stock Exchange”). Its immediate and ultimate holding company is DJM

Holding Ltd. and its ultimate controlling shareholders are Messrs. Liu Dejian, Liu Luyuan and

Zheng Hui. The address of the registered office of the Company is Cricket Square, Hutchins

Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands and its principal place of

business is Units 2001-05 & 11, 20/F, Harbour Centre, 25 Harbour Road, Wan Chai, Hong Kong.

The Company is an investment holding company. The principal activities of the Company and its

subsidiaries (collectively referred to as the “Group”) are engaged in (i) online and mobile games

development, including games design, programming and graphics and online and mobile games

operation, (ii) education business and (iii) mobile solution, products and marketing business.

The consolidated financial statements are presented in Renminbi (“RMB”), which is the same as

the functional currency of the Company.

2. BASIS OF PREPARATION

The consolidated financial statements have been prepared in accordance with Hong Kong

Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified

Public Accountants (“HKICPA”). In addition, the consolidated financial statements include

applicable disclosures required by the Rules Governing the Listing of Securities on the Stock

Exchange and by the Companies Ordinance (Cap 622 of the laws of Hong Kong).

The consolidated financial statements have been prepared on the historical cost basis except for

certain financial instruments and investment properties that are measured at fair values at the end

of each reporting period. Historical cost is generally based on the fair value of the consideration

given in exchange for goods and services.

— 14 —

3. APPLICATION OF NEW AND AMENDMENTS TO HKFRSs

New and amendments to HKFRSs that are mandatory effective for the current year

The Group has applied the following new and amendments to HKFRSs issued by the HKICPAfor the first time in the current year:

HKFRS 9 Financial Instruments

HKFRS 15 Revenue from Contracts with Customers and therelated Amendments

HK(IFRIC)-Int 22 Foreign Currency Transactions and AdvanceConsideration

Amendments to HKFRS 2 Classification and Measurement of Share-basedPayment Transactions

Amendments to HKFRS 4 Applying HKFRS 9 Financial Instruments withHKFRS 4 Insurance Contracts

Amendments to HKAS 28 As part of the Annual Improvements to HKFRSs2014-2016 Cycle

Amendments to HKAS 40 Transfers of Investment Property

Except for HKFRS 9 and HKFRS 15, the application of the new and amendments to HKFRSs inthe current year has had no material impact on the Group’s financial performance and positionsfor the current and prior years and/or on the disclosures set out in these consolidated financialstatements.

New and amendments to HKFRSs in issue but not yet effective

The Group has not early applied the following new and amendments to HKFRSs that have beenissued but are not yet effective:

HKFRS 16 Leases1

HKFRS 17 Insurance Contracts3

HK(IFRIC)-Int 23 Uncertainty over Income Tax Treatments1

Amendments to HKFRS 3 Definition of a Business4

Amendments to HKFRS 9 Prepayment Features with NegativeCompensation1

Amendments to HKFRS 10and HKAS 28

Sale or Contribution of Assets between anInvestor and its Associate or Joint Venture2

Amendments to HKAS 1 and HKAS 8 Definition of Material5

Amendments to HKAS 19 Plan Amendment, Curtailment or Settlement1

Amendments to HKAS 28 Long-term Interests in Associates and JointVentures1

Amendments to HKFRSs Annual Improvements to HKFRSs 2015 — 2017Cycle1

1 Effective for annual periods beginning on or after 1 January 2019.2 Effective for annual periods beginning on or after a date to be determined.3 Effective for annual periods beginning on or after 1 January 2021.4 Effective for business combinations and asset acquisitions for which the acquisition date is

on or after beginning of the first annual period beginning on or after 1 January 2020.5 Effective for annual periods beginning on or after 1 January 2020.

— 15 —

Except for the HKFRS16, the directors of the Company anticipate that the application of all othernew and amendments to HKFRSs will have no material impact on the consolidated financialstatements in the forseeable future.

4. REVENUE, OTHER INCOME AND GAINS

2018 2017

RMB’000 RMB’000

Revenue

Online and mobile games revenue 2,367,405 1,672,858

Education revenue 2,565,556 2,105,290

Mobile solution, products and marketing revenue 104,578 89,475

5,037,539 3,867,623

Disaggregation of revenue from contracts with customers

Set out below is the reconciliation of the revenue from contracts with customers with the

amounts disclosed in the segment information.

Types of goods and services

For the year ended 31 December 2018

Online andmobilegames

revenueEducation

revenue

Mobilesolution,

products andmarketing

revenue Total

RMB’000 RMB’000 RMB’000 RMB’000

Revenue from sales of pre-paid game

cards for online and mobile games 2,367,405 — — 2,367,405

Sales of education equipment and

related goods — 2,470,477 — 2,470,477

Revenue from provision of mobile

solution, products and marketing

services — — 104,578 104,578

Revenue from educational services — 95,079 — 95,079

2,367,405 2,565,556 104,578 5,037,539

— 16 —

Timing of revenue recognition

For the year ended 31 December 2018

Online andmobilegames

revenueEducation

revenue

Mobilesolution,

products andmarketing

revenue Total

RMB’000 RMB’000 RMB’000 RMB’000

A point in time 2,367,405 2,470,477 — 4,837,882

Over time — 95,079 104,578 199,657

2,367,405 2,565,556 104,578 5,037,539

Geographical information

For the year ended 31 December 2018

Online andmobilegames

revenueEducation

revenue

Mobilesolution,

products andmarketing

revenue Total

RMB’000 RMB’000 RMB’000 RMB’000

People’s Republic of China (the

“PRC”) 2,214,560 306,552 — 2,521,112

United States of America (“USA”) 122,842 1,056,983 — 1,179,825

Russia — 431,932 — 431,932

United Kingdom (“UK”) — 184,953 — 184,953

Germany — 123,406 — 123,406

Hong Kong — 1,021 98,746 99,767

France — 68,615 — 68,615

Egypt — 52,073 — 52,073

Australia — 40,596 — 40,596

Netherlands — 37,909 — 37,909

Vietnam — 33,949 — 33,949

Spain — 27,802 — 27,802

Italy — 22,788 — 22,788

Ireland — 17,468 — 17,468

India — 15,184 — 15,184

Others 30,003 144,325 5,832 180,160

2,367,405 2,565,556 104,578 5,037,539

— 17 —

2018 2017

RMB’000 RMB’000

Other income and gains

Gain on fair value changes of investment properties 9,310 10,726

Government grants (Note) 51,913 61,591

Interest income 13,328 7,066

Donation — 540

Net foreign exchange gain 24,348 —

Game implementation income 1,851 5,413

Rental income, net of negligible outgoing expenses 14,334 6,803

Server rental income 47 290

Others 3,058 2,964

118,189 95,393

Note: Government grants were received from the government of the PRC mainly for

subsidising the costs incurred by the Group in conducting and launching research and

development projects in Fujian Province, the PRC, relating to software or technology

development with no unfulfilled conditions or contingencies relating to the grants. In

addition, the amount also included the release of approximately RMB6,161,000 (2017:

RMB1,811,000) for the year ended 31 December 2018 recognised in profit or loss on a

systematic basis over the estimated useful life of the property, plant and equipment

related to the government grants on capital expenditure.

5. FINANCE COSTS

2018 2017

RMB’000 RMB’000

Interest on secured bank borrowings 10,756 5,918

Interest on promissory note 1,165 1,068

Other interest expense 494 3,423

12,415 10,409

— 18 —

6. SEGMENT INFORMATION

Information reported to the executive directors of the Company, being the chief operating

decision maker (“CODM”), for the purposes of resource allocation and assessment of segment

performance focuses on types of goods or services delivered or provided.

The following is an analysis of the Group’s revenue and results by reportable segments:

2018

Online andmobilegames Education

Mobilesolution,

products andmarketing Total

RMB’000 RMB’000 RMB’000 RMB’000

Segment revenue 2,367,405 2,565,556 104,578 5,037,539

Segment profit (loss) 1,401,655 (495,138) (16,508) 890,009

Unallocated other income and gains 48,925

Unallocated expenses and losses (370,781)

Profit before taxation 568,153

2017

Online and

mobile

games Education

Mobile

solution,

products and

marketing Total

RMB’000 RMB’000 RMB’000 RMB’000

Segment revenue 1,672,858 2,105,290 89,475 3,867,623

Segment profit (loss) 807,912 (491,711) (2,406) 313,795

Unallocated other income and gains 19,399

Unallocated expenses and losses (364,980)

Net fair value gain on held-for-trading

investment 58

Loss before taxation (31,728)

— 19 —

The accounting policies of the operating segments are the same as the Group’s accounting

policies. Segment profit (loss) represents the profit earned by or loss incurred from each segment

without allocation of net fair value gain on held-for-trading investment, and unallocated income,

gains, expenses and losses. This is the measure reported to the CODM for the purposes of

resource allocation and performance assessment.

All of the segment revenue reported above is from external customers.

The following is an analysis of the Group’s assets by reportable and operating segments:

2018 2017

RMB’000 RMB’000

Online and mobile games 2,988,020 2,377,169

Education 2,835,697 2,257,793

Mobile solution, products and marketing 179,559 200,240

Total segment assets 6,003,276 4,835,202

Unallocated 742,666 1,000,455

6,745,942 5,835,657

For the purposes of monitoring segment performance and allocating resources, all assets are

allocated to operating segments other than those assets managed on group basis, such as equity

instruments at fair value through other comprehensive income (“FVTOCI”)/available-for-sale

investments, loan receivables, properties under development, certain prepaid lease payments and

certain bank balances and cash. No analysis of the Group’s liabilities by operating segments is

disclosed as they are not regularly provided to the CODM for review.

— 20 —

Geographical information

The Group’s operations are mainly located in the PRC, USA, Russia and the UK.

The Group’s revenue from external customers by geographical location of the operations are

detailed below:

2018 2017RMB’000 RMB’000

PRC 2,521,112 1,890,481USA 1,179,825 1,032,998Russia 431,932 236,880UK 184,953 153,290Germany 123,406 68,542Hong Kong 99,767 86,881France 68,615 49,143Egypt 52,073 2,458Australia 40,596 50,810Netherlands 37,909 18,164Vietnam 33,949 20,561Spain 27,802 21,612Italy 22,788 25,827Ireland 17,468 23,896India 15,184 12,437Others 180,160 173,643

5,037,539 3,867,623

The Group’s non-current assets, excluding equity instruments at FVTOCI/available-for-sale

investments, trade receivables, restricted bank deposit, loan receivables and deferred tax assets,

by geographical location of assets are detailed below:

2018 2017

RMB’000 RMB’000

PRC 2,076,515 1,939,035

UK 739,784 773,642

Hong Kong 233,070 309,040

USA 287,949 74,668

France 43 135

Germany 182 265

Thailand 972 1,160

3,338,515 3,097,945

No single customer of the Group individually contributed over 10% of the Group’s revenue for

the years ended 31 December 2018 and 2017.

— 21 —

7. TAXATION

2018 2017

RMB’000 RMB’000

The tax charge comprises:

Hong Kong Profits Tax

- Current year 6,138 6,209

- (Over) under provision in prior years (1,746) 230

4,392 6,439

PRC Enterprise Income Tax (“EIT”)

- Current year 122,485 55,450

- Withholding tax 4,216 6,419

- (Over) under provision in prior years (2,499) 60

124,202 61,929

Taxation in other jurisdictions

- Current year 4,060 1,441

- Under (over) provision in prior years 338 (2,788)

4,398 (1,347)

Deferred taxation

- Current year (41,643) (9,812)

91,349 57,209

Hong Kong Profits Tax is calculated at 16.5% on the estimated assessable profit for both years.

PRC EIT is calculated at the applicable tax rates in accordance with the relevant laws and

regulations in the PRC.

For the year ended 31 December 2018, the USA income tax rates applicable to subsidiaries

incorporated in the USA is 21% (2017: 39%) for federal tax and 8.84% (2017: 8.84%) for state

income tax.

The United Kingdom Corporate Tax Rate applicable to subsidiaries is 19% for the year ended 31

December 2018 (2017: 20% from 1 January 2017 to 31 March 2017, and 19% effective from 1

April 2017 to 31 December 2017).

Taxation arising in other jurisdictions is calculated at the rate prevailing in the relevant

jurisdiction.

— 22 —

8. DIVIDENDS

2018 2017

RMB’000 RMB’000

Dividends recognised as distribution during the year:

2018 Interim - HKD0.10 (2017: 2017 Interim dividend of

HKD0.10) per share 44,780 43,137

2017 Final - HKD0.10 (2017: 2016 Final dividend of HKD0.10)

per share 44,589 44,458

89,369 87,595

The final dividend of HKD0.15 (2017: HKD0.10) per share which has been proposed by the

directors and is subject to approval by the shareholders in the annual general meeting, amounted

to approximately RMB69,809,000 (2017: RMB44,661,000).

9. EARNINGS (LOSS) PER SHARE

The calculation of the basic and diluted earnings (loss) per share attributable to the owners of

the Company is based on the following data:

2018 2017

RMB’000 RMB’000

Earnings (loss) for the purpose of basic and diluted earnings

(loss) per share:

- Profit (loss) for the year attributable to the owners of the

Company 545,573 (20,843)

Number of shares

2018 2017

’000 ’000

Weighted average number of shares in issue during the year for

the purpose of basic earnings (loss) per share (after adjusted

for the effect of unvested and treasury shares held under share

award scheme) 532,665 506,081

Effect of dilutive potential shares from the Company’s share

option scheme (Note) 805 —

Number of shares for the purpose of calculating diluted earnings

(loss) per share (after adjusted for the effect of unvested and

treasury shares held under share award scheme) 533,470 506,081

— 23 —

Note: The calculation of diluted loss per share for the year ended 31 December 2017 did not

assume the exercise of the Company’s outstanding share options as the exercise of the

Company’s share options would result in decrease in loss per share.

10. TRADE RECEIVABLES

2018 2017

RMB’000 RMB’000

Trade receivables 468,871 390,467

Less: Allowance of credit losses (18,436) (6,483)

450,435 383,984

As at 31 December 2018 and 1 January 2018, trade receivable from contracts with customers

amounted to RMB450,435,000 and RMB383,984,000, respectively.

The Group generally allows a credit period ranging from 30 days to 90 days to its agents/trade

customers. For customers in education business, the Group accepts settlement of trade

receivables by four years in accordance with the agreements.

The following is an aged analysis of trade receivables net of allowance for credit losses

presented based on the date of delivery of goods/date of rendering of services which

approximated the respective revenue recognition dates.

2018 2017

RMB’000 RMB’000

Trade debtors

0 - 30 days 233,932 227,847

31 - 60 days 107,939 81,630

61 - 90 days 45,849 29,269

Over 90 days 54,563 29,509

Receivables with extended credit terms

Due within one year 8,152 11,817

Due after one year — 3,912

450,435 383,984

— 24 —

As at 31 December 2018, included in the Group’s trade receivables balance are debtors with

aggregate carrying amount of RMB132,176,000 which are past due as at the reporting date. Out

of the past due balances, RMB48,112,000 has been past due 90 days or more and is not

considered as in default for which the Group has not provided for impairment loss as there has

not been significant changes in credit quality and amounts are still considered recoverable based

on historical experience. The Group does not hold any collateral over these balances.

Before accepting any new agent/customer, the Group uses an internal credit assessment policy

to assess the potential agent/customer’s credit quality and define credit limits by agent/customer.

Management closely monitors the credit quality of trade receivables and considers the trade

receivables that are neither past due nor impaired to be of a good credit quality.

11. TRADE AND OTHER PAYABLES

2018 2017

RMB’000 RMB’000

Trade payables 281,236 242,169

Accrued staff costs 224,604 183,284

Government grants (a) 12,974 13,495

Receipt in advance (b) 385 86,511

Other tax payables 38,633 26,476

Others (c) 225,208 128,801

783,040 680,736

Notes:

(a) Government grants are assets related and amortised over the life of related assets or costs

related and recognised as income over the period when the Group recognised expense for

the related costs for which the Group is entitled to be compensated.

(b) As at 1 January 2018, approximately RMB86,445,000 included in receipt in advance was

reclassified to contract liabilities upon the application of HKFRS 15.

(c) Others mainly represent advertising payable, office and server rental payable, consideration

payable and other miscellaneous items for operating and investing activities.

— 25 —

The following is an aged analysis of trade payables presented based on the invoice date at the

end of the reporting period.

2018 2017

RMB’000 RMB’000

0 - 90 days 252,832 230,001

91 - 180 days 21,552 7,931

181 - 365 days 698 2,288

Over 365 days 6,154 1,949

281,236 242,169

12. SECURED BANK BORROWINGS

The carrying amount of the secured bank borrowings is repayable:

2018 2017

RMB’000 RMB’000

Within one year 155,157 146,132

Within a period of more than one year

but not exceeding two years 81,599 1,246

Within a period of more than two years

but within five years 88,005 85,336

324,761 232,714

Less: Amounts due within one year shown

under current liabilities (155,157) (146,132)

Amounts shown under non-current liabilities

169,604 86,582

The borrowings were secured by a pledged bank deposit, a pledge of property of a subsidiary,

corporate guarantee provided by the Company and corporate guarantee provided by its

subsidiaries.

— 26 —

LIQUIDITY AND CAPITAL RESOURCES

As at 31 December 2018, the Group had pledged bank deposits, restricted bank

deposit, bank deposit over three months, restricted bank balances and bank balances

and cash of approximately RMB1,723.2 million (31 December 2017: RMB1,748.9

million). The gearing ratio (consolidated secured bank borrowings/consolidated total

equity) was 0.07 (31 December 2017: 0.05). As at 31 December 2018, total secured

bank borrowings of the Group amounted to approximately RMB324.8 million (31

December 2017: RMB232.7 million) which were variable-rate loans. The bank

borrowings were secured by a pledged bank deposit, a pledge of property of a

subsidiary, and corporate guarantee provided by the Company and its subsidiaries.

As at 31 December 2018, the Group had net current assets of approximately

RMB1,872.5 million as compared with approximately RMB1,658.8 million as at 31

December 2017.

STAFF INFORMATION

For the year under review, the breakdown of the number of employees of the Group

is set out below:

At31 December

At30 June

At31 December

2018 2018 2017

Research and development 3,504 3,475 3,836Selling and marketing 1,310 1,296 1,384Accounting, finance and general

administration 955 956 948Production 331 311 278

Total 6,100 6,038 6,446

— 27 —

DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS AND SHORTPOSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES

As at 31 December 2018, the interests and short positions of the Directors and chiefexecutive of the Company in the shares, underlying shares or debentures of theCompany or any of its associated corporations (within the meaning of Part XV of theSecurities and Futures Ordinance (Cap 571 of the Laws of Hong Kong) (“SFO”)),which were required to be notified to the Company and the Stock Exchange pursuantto Divisions 7 and 8 of Part XV of the SFO (including interests or short positionswhich they were taken or deemed to have under provisions of the SFO), or whichwere required to be entered in the register kept by the Company pursuant to Section352 of the SFO or which were required, pursuant to the Model Code for SecuritiesTransactions by Directors of Listed Issuers (the “Model Code”) as set out inAppendix 10 to the Rules Governing the Listing of Securities on the Stock Exchange(the “Listing Rules”), to be notified to the Company and the Stock Exchange, wereas follows:

Name of DirectorName of

CompanyCapacity andnature of interests

Number of sharesand underlyingshares held or

amount ofregistered capital

contributed

Approximatepercentage ofshareholding

(Note 1)

Liu Dejian(Note 2)

The Company Beneficial owner,through acontrolledcorporation andbeneficiary of atrust

255,822,457 (L) 48.16%

Liu Dejian(Note 3)

NetDragon(Fujian)

Beneficial owner RMB299,880,000 (L) 99.96%

Leung Lim Kin,Simon (Note 4)

The Company Beneficial owner 1,363,530 (L) 0.26%

Liu Luyuan(Note 2)

The Company Beneficial owner andbeneficiary ofcertain trust

255,822,457 (L) 48.16%

Liu Luyuan(Note 3)

NetDragon(Fujian)

Beneficial owner RMB299,880,000 (L) 99.96%

— 28 —

Name of DirectorName of

CompanyCapacity andnature of interests

Number of sharesand underlyingshares held or

amount ofregistered capital

contributed

Approximatepercentage ofshareholding

(Note 1)

Zheng Hui(Note 2)

The Company Beneficial owner andthrough controlledcorporations

255,822,457 (L) 48.16%

Zheng Hui(Note 3)

NetDragon(Fujian)

Beneficial owner RMB299,880,000 (L) 99.96%

Chen Hongzhan(Note 5)

The Company Beneficial owner andbeneficiary ofcertain trust

11,197,019 (L) 2.11%

Chao Guowei,Charles(Note 6)

The Company Beneficial owner 918,000 (L) 0.17%

Lee Kwan Hung(Note 7)

The Company Beneficial owner 692,019 (L) 0.13%

Liu Sai Keung,Thomas(Note 8)

The Company Beneficial owner 975,019 (L) 0.18%

Notes:

1. The letter “L” denotes the shareholder’s long position in the shares, underlying shares and share

capital of the relevant member of the Group.

2. Liu Dejian is interested in 100.00% of the issued voting shares of DJM Holding Ltd., which in

turn is interested in 35.97% of the issued voting shares of the Company. Liu Dejian is also

interested in 0.39% of the issued voting shares of the Company which is represented by

beneficial interest of 1,884,000 shares and a beneficiary of a trust of 197,019 shares.

Liu Luyuan is interested in 5.31% of the issued voting shares of the Company which is

represented by interest held as a beneficiary of certain trust holding in aggregate 26,541,819

shares, and the rest being underlying shares of interest of 1,684,000 share options granted by the

Company.

— 29 —

Zheng Hui is interested in 100.00% of the issued share capital of Fitter Property Inc., which in

turn is interested in 3.58% of the issued voting shares of the Company. Zheng Hui is interested

in 100.00% of the issued share capital of Eagle World International Inc., which in turn is

interested in 2.62% of the issued voting shares of the Company. Zheng Hui is also interested in

0.28% of the issued shares of the Company which is represented by beneficial interest of

1,497,000 shares.

Liu Dejian is a brother of Liu Luyuan and a cousin of Zheng Hui who have agreed to act in

concert to acquire interests in the shares in the Company. All of Liu Dejian, Liu Luyuan and

Zheng Hui are deemed to be interested in 48.16% of the issued voting shares of the Company

through their direct and deemed shareholding in all of DJM Holding Ltd., a trust in favour of Liu

Luyuan, a trust in favour of Liu Dejian, Fitter Property Inc., Eagle World International Inc. and

their respective shares held as beneficial owner in each of their personal capacities.

3. Liu Dejian, Liu Luyuan and Zheng Hui are interested in 3.23%, 0.07% and 96.66%, respectively,

of the registered capital of Fujian NetDragon Websoft Co., Ltd. (福建網龍計算機網絡信息技術有限公司) (“NetDragon (Fujian)”). Liu Dejian, Liu Luyuan and Zheng Hui have agreed to act in

concert to acquire interests in the registered capital of NetDragon (Fujian). All of Liu Dejian, Liu

Luyuan and Zheng Hui are deemed to be interested in 99.96% of the registered capital of

NetDragon (Fujian).

4. Leung Lim Kin, Simon is interested in 0.26% of the issued voting shares of the Company which

is represented by beneficial interest of 1,363,530 shares.

5. Chen Hongzhan is interested in 2.11% of the issued voting shares of the Company which is

represented by personal interest of 156,200 shares and interest held as a beneficiary of certain

trust holding in aggregate of 11,040,819 shares.

6. Chao Guowei, Charles is interested in 0.17% of the issued voting shares of the Company which

is represented by personal interest of 579,500 shares and the rest being the underlying shares of

interest of 338,500 shares options granted by the Company.

7. Lee Kwan Hung is interested in 0.13% of the issued voting shares of the Company which is

represented by personal interest of 274,019 shares and the rest being underlying shares of interest

of 418,000 share options granted by the Company.

8. Liu Sai Keung, Thomas is interested in 0.18% of the issued voting shares of the Company which

is represented by personal interest of 257,019 shares and the rest being underlying shares of

interest of 718,000 share options granted by the Company.

Save as disclosed above, to the best knowledge of the Directors, as at 31 December2018, none of the Directors and chief executive of the Company had any interest andshort positions in any shares, underlying shares or debentures of the Company or anyof its associated corporations (within the meaning of Part XV of the SFO) which wererequired to be notified to the Company and the Stock Exchange pursuant to Divisions7 and 8 of Part XV of the SFO (including interests and short positions which they

— 30 —

were taken or deemed to have under such provisions of the SFO), or which wererequired to be entered in the register kept by the Company pursuant to Section 352of the SFO or which were required, pursuant to the Model Code to be notified to theCompany and the Stock Exchange.

SUBSTANTIAL SHAREHOLDERS’ INTERESTS AND OTHER PERSONS’INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARESAND DEBENTURES

So far as is known to the Directors, as at 31 December 2018, the following persons(other than a Director or chief executive of the Company) had, or were deemed ortaken to have interests or short positions in the shares or underlying shares of theCompany which would fall to be disclosed to the Company under the provisions ofDivisions 2 and 3 of Part XV of the SFO or, which were required to be entered in theregister kept by the Company under Section 336 of the SFO or, who were directly orindirectly interested in 10% or more of the nominal value of any class of share capitalcarrying rights to vote in all circumstances at general meetings of any member of theGroup:

Name of ShareholderName ofCompany

Capacity andnature of interests

Number ofshares andunderlying

shares held oramount ofregistered

capitalcontributed

Approximatepercentage ofshareholding

(Note 1)

DJM Holding Ltd. The Company Beneficial owner 191,078,100 (L) 35.97%

IDG Group (Note 2) The Company Beneficial owner 78,333,320 (L) 14.75%

Ho Chi Sing (Note 2) The Company Through controlledcorporations

78,333,320 (L) 14.75%

Zhou Quan (Note 2) The Company Through controlledcorporations

73,490,095 (L) 13.84%

First Elite GroupLimited (Note 3)

The Company Beneficial owner andthrough controlledcorporation

0 (L) 0%

Jardine PTC Limited(Note 3)

The Company Trustee 26,541,819 (L) 5.00%

— 31 —

Notes:

1. The letter “L” denotes the shareholder’s long position in the share capital of the relevant member

of the Group.

2. The IDG Group is comprised of four limited partnerships, namely IDG Technology Venture

Investments, L.P., IDG-Accel China Growth Fund L.P., IDG-Accel China Growth Fund-A L.P.

and IDG-Accel China Investors L.P., being interested in approximately 2.05%, 9.79%, 2.00% and

0.91% respectively, in the Company who are deemed to be acting in concert to acquire interests

in the Company, and their respective controlling entities. The controlling structure of each of the

above partnerships is as follows:

a) IDG Technology Venture Investments, L.P. is controlled by its sole general partner, IDG

Technology Venture Investments, LLC, which in turn is controlled by its managing

members, Zhou Quan and Ho Chi Sing.

b) IDG-Accel China Growth Fund L.P. and IDG-Accel China Growth Fund-A L.P. are

controlled by their sole general partner, IDG-Accel China Growth Fund Associates L.P.,

which in turn is controlled by its sole general partner, IDG-Accel China Growth Fund GP

Associates Ltd.. IDG-Accel China Growth Fund GP Associates Ltd. is held as to 35.00% by

each of Zhou Quan and Ho Chi Sing.

c) IDG-Accel China Investors L.P. is controlled by its sole general partner, IDG-Accel China

Investor Associates Ltd., which in turn is held as to 100.00% by Ho Chi Sing.

3. First Elite Group Limited was dissolved in November 2018. 26,541,819 shares directly held by

Richmedia Holdings Limited, a company wholly-owned by Jardine PTC Limited, which held

relevant interest in trust for Liu Luyuan.

Save as disclosed above, the Directors are not aware of any persons (other than a

Director or chief executive of the Company) who had, or were deemed or taken to

have interests or short positions in the shares or underlying shares of the Company

which would fall to be disclosed to the Company under the provisions of Divisions

2 and 3 of Part XV of the SFO or, which were required to be entered in the register

kept by the Company under Section 336 of the SFO or who were directly or indirectly

interested in 10% or more of the nominal value of any class of share capital carrying

rights to vote in all circumstances at general meetings of any member of the Group

as at 31 December 2018.

— 32 —

SHARE OPTION SCHEME

Pursuant to the resolution of the shareholders of the Company dated 24 May 2018,the Company adopted a new share option scheme (the “New Share Option Scheme”)to replace the existing share option scheme which expired on 12 June 2018 (the“Existing Share Option Scheme”). As at the date of this announcement, no shareoptions were granted and there were no outstanding share options under the NewShare Option Scheme. Details of the share options outstanding and movement duringthe year ended 31 December 2018 are as follows:

GranteeDate of

grantExercise

Price

As at1 January

2018

Number of share options

As at31

December2018Granted Exercised Lapsed

HKD

Independent non-executive Directors

Chao Guowei,Charles

04.12.2013 15.72 238,500 — — — 238,500

31.03.2017 23.65 100,000 — — — 100,000

Lee Kwan Hung 04.12.2013 15.72 318,000 — — — 318,000

31.03.2017 23.65 100,000 — — — 100,000

Liu Sai Keung,Thomas

23.04.2012 5.74 300,000 — — — 300,000

04.12.2013 15.72 318,000 — — — 318,000

31.03.2017 23.65 100,000 — — — 100,000

Others

Employees 28.04.2011 4.80 359,367 — 14,375 1,500 343,492

22.07.2011 4.60 8,000 — — — 8,000

23.04.2012 5.74 175,717 — 25,600 — 150,117

12.09.2012 7.20 50,250 — — — 50,250

16.01.2013 11.164 277,275 — 25,950 — 251,325

25.04.2014 14.66 278,000 — — — 278,000

11.05.2015 27.75 194,000 — 60,000 — 134,000

Total 2,817,109 — 125,925 1,500 2,689,684

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SHARE AWARD SCHEME

The Company

On 2 September 2008 (the “NetDragon Adoption Date”), the Board approved andadopted the share award scheme (the “NetDragon Share Award Scheme”) in whichselected employees of the Group are entitled to participate. Unless early terminatedby the Board, the NetDragon Share Award Scheme shall be valid and effective for aterm of ten years commencing on the NetDragon Adoption Date. The Board shall notgrant any award of shares which would result in the nominal value of shares whichare the subject of awards granted by the Board under the NetDragon Share AwardScheme representing in aggregate over 10% of the issued capital of the Companyfrom time to time.

Pursuant to the rules of the NetDragon Share Award Scheme, the Group has signedan agreement with Bank of Communications Trustee Limited (the “Trustee”), for thepurpose of administering the NetDragon Share Award Scheme and holding theawarded shares before they are vested.

1,190,800 awarded shares were granted to Leung Lim Kin, Simon, vice chairman andexecutive director of the Company on 19 April 2018. 1,979,520 awarded sharesgranted to a number of selected participants were outstanding as at 31 December2018. The awarded shares, which were purchased at an average price of HKD18.96per share by the Trustee, will be transferred to the selected employees at nilconsideration, subject to receipt by the Trustee of (i) transfer documents prescribedby the Trustee and duly signed by the selected employee within the period stipulatedin the vesting notice issued by the Trustee to the selected employee and (ii) aconfirmation from the Company that all vesting conditions having been fulfilled.

Among 586,100 vested awarded shares as at 31 December 2018, a total of 290,890awarded shares were vested by the Director.

Subject to the acceptance by the relevant selected employees, such awarded sharesmay be held by the selected employees in their own names or such nominees,including any trustees, as designated by the selected employees.

Best Assistant Education Online Limited (“Best Assistant”)

On 7 August 2012, Best Assistant adopted a share award scheme as amended on 13February 2015 (the “Best Assistant Share Award Scheme”) in which selectedparticipants include senior management employees of Best Assistant and/or itssubsidiaries (“Best Assistant Group”), consultants to Best Assistant Group employedby any member of the Company, its associated companies or their subsidiaries

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(excluding Best Assistant Group) and any person who contributes to the developmentof Best Assistant Group which has been certified and determined by the board ofdirectors of Best Assistant with the affirmative vote of one director appointed by IDGInvestors, Vertex or Alpha.

Subject to early termination, the Best Assistant Share Award Scheme shall be validand effective for a term of ten years commencing on 7 August 2012. Best Assistantmay also transfer shares awarded under the Best Assistant Share Award Schemewhether vested or unvested to other trusts and if there is a change in control of BestAssistant, all awarded shares shall immediately be vested. The board of directors ofBest Assistant may also waive any vesting conditions with the affirmative vote of onedirector appointed by IDG Investors, Vertex or Alpha. The maximum number ofshares which may be granted to the participants under the Best Assistant Share AwardScheme shall not exceed ten percent (10%) of the total issued share capital of BestAssistant from time to time or such number of shares as determined by the board ofdirectors of Best Assistant with the affirmative vote of one director appointed by IDGInvestors, Vertex or Alpha.

Pursuant to the rules of the Best Assistant Share Award Scheme, Best Assistant hassigned an agreement with the Trustee, for the purpose of administering the BestAssistant Share Award Scheme and holding the awarded shares before they arevested.

Subject to, inter alia, the receipt by the Trustee of (i) the prescribed transferdocuments duly signed by the selected participants within the period stipulated in thevesting notices; and (ii) confirmation from Best Assistant that all vesting conditionshaving been fulfilled, the awarded shares will be transferred to the selectedparticipants at nil consideration upon vesting.

As at 31 December 2018, 600,000 awarded shares were granted under the BestAssistant Share Award Scheme.

ISSUE OF SERIES A PREFERRED SHARES BY BEST ASSISTANT

On 6 January 2015, Best Assistant entered into a subscription agreement (“Series AAgreement”) with IDG-Accel China Growth Fund-L.P., IDG-Accel China GrowthFund-A L.P., IDG-Accel China Investors L.P. (together referred to as “IDGInvestors”), Vertex Asia Fund Pte. Ltd. (“Vertex”), Alpha Animation and Culture(Hong Kong) Company Limited (“Alpha”), Catchy Holdings Limited, DJM HoldingLtd., Creative Sky International Limited and NetDragon Websoft Inc. (“NetDragonBVI”), a direct wholly owned subsidiary of the Company (collectively referred to as“Series A Investors”) for the allotment and issue of an aggregate of 180,914,513

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Series A preferred Shares (“Series A Preferred Shares”) for a total consideration of

USD52,500,000 (equivalent to approximately HKD409.5 million). The Series A

Agreement and the issue and allotment of the Series A Preferred Shares were

completed on 13 February 2015.

Assuming all of the Series A Preferred Shares are fully converted into ordinary shares

of Best Assistant, the Company’s interest in ordinary shares of Best Assistant will be

reduced from 87.60% to approximately 79.25%.

As at 31 December 2018, no Series A Preferred Shares have been converted into

ordinary shares of Best Assistant.

ACQUISITION OF EDMODO, INC. AND ISSUE OF SERIES B PREFERREDSHARES BY BEST ASSISTANT

On 6 April 2018, Best Assistant, Digital Train Limited (“Digital Train”) as purchaser,

a wholly-owned subsidiary of Best Assistant, Educate Merger Sub, Inc. (“Merger

Sub”), a wholly-owned subsidiary of the purchaser, Edmodo, Inc. (“Edmodo”), Fortis

Advisors LLC, in its capacity as representative of the shareholders of Edmodo, and

the Company, solely with respect as guarantor for the timely performance of the

obligations of Best Assistant and Digital Train entered into an agreement and plan of

merger (the “Agreement and Plan of Merger”), pursuant to which Digital Train will

acquire Edmodo, for consideration in the form of cash and stock collectively valued

in the amount of USD137,500,000, by way of merger under the laws of the State of

Delaware.

Upon closing which took place on 2 May 2018, the Merger Sub merged with and into

Edmodo, the separate corporate existence of Merger Sub ceased, and Edmodo shall

continue its corporate existence as a wholly owned subsidiary of Digital Train in

accordance with Delaware law.

The consideration (subject to downward adjustment as provided in the Agreement)

was satisfied by (i) payment of an amount in cash equal to USD15,000,000 and (ii)

the issue of 112,560,245 Best Assistant Series B Shares.

As at 31 December 2018, no Series B Preferred Shares have been converted into

ordinary shares of Best Assistant.

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MODEL CODE OF CONDUCT FOR SECURITIES TRANSACTIONS BYDIRECTORS

The Company has adopted a code of conduct regarding securities transactions byDirectors on terms no less exacting than the required standard of dealings as set outin the Model Code under Appendix 10 to the Listing Rules. The Company confirmsthat, having made specific enquiry of all Directors, all the Directors have confirmedthat they have complied with the required standard of dealings as set out on theModel Code under Appendix 10 to the Listing Rules and the code of conduct of theCompany regarding securities transactions by the Directors for the year ended 31December 2018.

FINAL DIVIDEND

At the Board meeting held on Tuesday, 26 March 2019, it was proposed that a finaldividend of HKD0.15 per share for the year ended 31 December 2018, amounting toapproximately RMB69,809,000 be paid on or before Friday, 5 July 2019 to theshareholders of the Company whose names appear on the Company’s register ofmembers at the close of business on Wednesday, 12 June 2019. The proposed finaldividend is subject to the approval by the shareholders of the Company at theforthcoming annual general meeting (the “2018 AGM”) to be held on Thursday, 6June 2019.

CLOSURE OF REGISTER OF MEMBERS

(a) For determining the entitlement to attend and vote at the 2019 AGM

The Company’s register of members will be closed from Friday, 31 May 2019 toThursday, 6 June 2019, both days inclusive, during which time no transfer ofshares will be registered. In order to ensure that the shareholders are entitled toattend and vote at the AGM, the shareholders must deliver their duly stampedinstruments of transfer, accompanied by the relevant share certificates, to theCompany’s branch share registrar in Hong Kong, Tricor Investor ServicesLimited at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong byno later than 4:30 p.m. on Thursday, 30 May 2019 for registration of the relevanttransfer.

(b) For determining the entitlement to the proposed final dividend

The Board has recommended the payment of a final dividend of HKD0.15 pershare for the year ended 31 December 2018 to shareholders whose names appearon the register of members of the Company on Thursday, 13 June 2019 subject

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to the approval of the shareholders of the Company at the AGM. For determining

the entitlement to the proposed final dividend, the register of members of the

Company will be closed from Thursday, 13 June 2019 to Friday, 14 June 2019,

both days inclusive, during which period no transfer of shares will be registered.

In order to qualify for the proposed final dividend, all transfers of shares,

accompanied by the relevant share certificates, must be lodged with the

Company’s branch share registrar in Hong Kong, Tricor Investor Services

Limited at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong for

registration not later than 4:30 p.m. on Wednesday, 12 June 2019.

PUBLICATION OF FINAL RESULTS AND 2018 ANNUAL REPORT

The final results announcement of the Company is published on the websites of the

Stock Exchange (http://www.hkexnews.hk) and the Company (http://ir.nd.com.cn).

The annual report will be dispatched to the shareholders of the Company and will be

available on the websites of the Stock Exchange (http://www.hkexnews.hk) and the

Company (http://ir.nd.com.cn) in due course.

ANNUAL GENERAL MEETING

The forthcoming AGM will be held on Thursday, 6 June 2019. A notice convening the

AGM will be published and dispatched to the shareholders of the Company in

accordance with the requirements of the Listing Rules in due course.

COMPETITION AND CONFLICT OF INTERESTS

None of the Directors or any of their respective associates (as defined under the

Listing Rules) has interest in any business that competes or may compete, either

directly or indirectly, with the businesses of the Group, or has any other conflict of

interests with the Group as at the date of this announcement.

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COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE

Throughout the year under review, the Company has complied with the codeprovisions of the Corporate Governance Code as set out in Appendix 14 to the ListingRules.

SCOPE OF WORK OF DELOITTE TOUCHE TOHMATSU

The figures in respect of the Group’s consolidated statement of financial position,consolidated statement of profit or loss and other comprehensive income,consolidated statement of changes in equity, condensed consolidated statement ofcash flows and the related notes thereto for the year ended 31 December 2018 as setout in the results announcement have been agreed by the Group’s auditor, DeloitteTouche Tohmatsu, to the amounts set out in the Group’s audited consolidatedfinancial statements for the year. The work performed by Deloitte Touche Tohmatsuin this respect did not constitute an assurance engagement in accordance with HongKong Standards on Auditing, Hong Kong Standards on Review Engagements or HongKong Standards on Assurance Engagements issued by the HKICPA and consequentlyno assurance has been expressed by Deloitte Touche Tohmatsu on the resultsannouncement.

CESSATION TO FURTHER ANNOUNCE AND PUBLISH QUARTERLYFINANICAL RESULTS

On 3 May 2018, the Board announced that as resolved at a meeting in May 2018, theCompany would not announce and publish the Company’s quarterly financial resultsfor the first three-month and nine-month periods of this and subsequent financialyears in order to reduce the administrative burden of the Company and allow theCompany to devote more of resources towards the development of its business. TheBoard considered that with its rapidly developing business and expected seasonality,this arrangement would be in the best interest of the Company.

The Company will continue to announce and publish its interim and annual resultsand reports in accordance with the requirements of the Listing Rules.

AUDIT COMMITTEE

The Company established the audit committee (the “Audit Committee”) on 15October 2007 which has adopted written terms of reference in compliance with theListing Rules. The primary duties of the Audit Committee are to review and superviseour financial reporting process and internal control systems, which include financial,operational and compliance controls and risk management functions.

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The Audit Committee reviews the interim and annual consolidated financial resultsof the Group. In addition, the Audit Committee also reviews and approves the pricingpolicy and the performance for the continued connected transactions and connectedtransactions relating to structure contracts, other contracts and control documents ofthe Group.

Our Audit Committee comprises three independent non-executive Directors, namelyChao Guowei, Charles, Lee Kwan Hung and Liu Sai Keung, Thomas. Chao Guowei,Charles is the chairman of the Audit Committee.

The terms of reference of the Audit Committee are posted on the websites of theStock Exchange and the Company. The Group’s audited consolidated financialstatements for the year ended 31 December 2018 have been reviewed by the AuditCommittee. The Audit Committee is of the opinion that the preparation of suchresults complied with the applicable accounting standards and requirements and thatadequate disclosures have been made.

PURCHASE, SALE OR REDEMPTION OF SECURITIES

During the year ended 31 December 2018, the Company bought back a total of899,000 shares on the Stock Exchange at an aggregate consideration ofHKD12,042,864 before expenses.

Details of the shares buy-backs are as follows:

Month of sharesbought back

Number ofordinary

shares boughtback

Price per shareAggregate

considerationpaidHighest Lowest

HKD HKD HKD

January 2018 26,000 21.85 21.85 568,100June 2018 89,000 17.10 16.78 1,513,340December 2018 784,000 13.28 11.96 9,961,424

By Order of the BoardNetDragon Websoft Holdings Limited

Liu DejianChairman

Hong Kong, 26 March 2019

As at the date of this announcement, the Board comprises five executive Directors, namely Liu Dejian,

Leung Lim Kin Simon, Liu Luyuan, Zheng Hui and Chen Hongzhan; one non-executive Director,

namely Lin Dongliang; and three independent non-executive Directors, namely Chao Guowei,

Charles, Lee Kwan Hung and Liu Sai Keung, Thomas.

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